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The Multi-Enforcer Approach To Securities Fraud Deterrence: A Critical Analysis

Participants in the U.S. capital markets can be sued for securities fraud by a mishmash of enforcers, including the SEC, class action plaintiffs, and state regulators. Does this multi-enforcer approach make sense from a deterrence perspective? This Article suggests that the answer is probably no. Although in theory there are conditions under which a multi-enforcer approach would promote optimal deterrence, it is unclear at best that those conditions exist in the United States. And further empirical research, while warranted, is unlikely to resolve the issue definitively. The status quo tends to persevere in the face of this sort of irreducible uncertainty. But this Article argues that a better response would be to grant a federal agency, like the SEC, exclusive authority to prosecute national securities frauds, while at the same time enacting reforms designed to better align the agency’s enforcement incentives with the public interest (thus protecting against the risk that it would under-deter). In addition to conferring the benefits of simplicity, a unitary-enforcer approach would allow the United States to capture important enforcer-based efficiency gains that are unattainable in the current regime.